(7) True Endowment and Funds Functioning as Endowments 



The Smithsonian uses the "total return" approach to investment management of 

 pooled true endowment funds and quasi-endowment funds, referred to collectively as 

 the endowment. Each year, the endowment pays out an amount for current expendi- 

 tures based upon a number of factors evaluated and approved by the Board of Regents. 

 The payout for 199S was 4.5 percent of the average market value of the endowment 

 over the prior five years. The difference between the total return (i.e., dividends, inter- 

 est and net gains), and the payout is reinvested when there is an excess of total return 

 over payout, or withdrawn from previously accumulated returns when there is a defi- 

 ciency of total return to payout. The payout amount exceeded the total return in fiscal 

 year 1998 and the deficit was withdrawn from the endowment asset pool. The with- 

 drawal is reported as a non-operating loss in the accompanying statement of financial 

 activity- (see note 8). 



Substantially all of the investments of the endowment are pooled on a market value 

 basis, with individual funds subscribing to or disposing of units on the basis of the per 

 unit market value at the beginning of the month in which the transaction takes place. 

 At September 30, 1998, each unit had a market value of S614. The market value of the 

 pool's net assets at September 30, 1998, was $579,444,000. This represents all pooled 

 investments plus net receivables and payables related to investment transactions. 



Each fund participating in the investment pool receives an annual payout equal to 

 the number of units owned times the annual payout amount per unit. The payout for 

 fiscal year 199S w-as S21.00 per unit Based on approved Board policy, if the market 

 value of any endowment fund is less than 110 percent of the historical value, the cur- 

 rent payout is limited to the actual interest and dividends allocable to that fund. 



Net asset balances of the endowment consisted of the following at September 30, 1998: 



fSOOOo 



Unrestricted 

 Unresmcted-desisimed 



S 215.094 



172.514 



Total unrestricted 



Temporarily restricted 

 Permanently restricted 



138.686 

 62.972 



Total endowment net assets 



(8) Composition of Total Return from Investments 



Total return from investments consisted of the following for the year ended Septem- 

 ber 30, 1998: 



(SOOOsi 



Composition of Endowment Return: 



Endowment payout 



Payout in excess of investment income 



Total investment income 

 Less - investment fees 



Net investment income 

 Net realized and unrealized loss on investments 



Endowment total return 



Endowment total return is reported as 519,726,000 in operating revenue and 

 (530,825,000) in nonoperating endowment return in the statement of financial activity. 



Composition of Short-Term Investment Total Return: 



s 



19.726 



(2.171) 



17.555 

 (1.469) 



16.086 



(27.185) 



■ 



; , .,>, 



tively. Depreciation expense for fiscal year 1998 totaled S38,493,000 in the federal 

 funds and 57,388,000 in the trust funds. 



(10) Debt 



In January 1998, the District of Columbia issued S41.3 million of tax-exempt revenue 

 bonds on behalf of the Smithsonian. The Smithsonian is obligated under these bonds 

 as follows: 



;'/''- 



Series 1997 Revenue Bonds. Serial, with principal amounts ranging 

 from $800,000 to Sl.225.000 interesl rates ranging from 4.10% 

 to 4.75%. maturing at various points from February 1 . 2002 

 through 2012 



Series 1997 Revenue Bonds. Term: 



Interest rate 5.00% due February 1. 2017 

 Interest rate 4.75% due February 1. 2018 

 Interest rate 5.00% due February 1. 202S 



Total bonds at face value 



Less - unamortized bond discount 



Total bonds payable 



7.105 

 1.640 



41320 



"94 



The serial and term bonds represent an unsecured general obligation of the Smith- 

 sonian. Proceeds from the sale of the bonds will finance certain renovations of and 

 improvements to the National Museum of Natural History, fund capitalized interest, 

 and pay certain costs of issuing the bonds. Interest on the bonds is payable semi- 

 annually on August 1 and February 1, beginning on August 1, 1998. Principal and 

 interest payments will be funded solely through unrestneted Trust funds. 



The term bonds maturing on February 1, 2017 and 2028 are subject to mandatory 

 redemption by operations of sinking fund installments. Installment payments for the 

 term bond maturing February 1, 2017, begin on February 1, 2013 and range from 

 SI, 285, 000 to 51,565,000 per year through the matunty date. Installment payments 

 for the term bond maturing February 1, 2028 begin on February 1, 2019 and range 

 from $1,720,000 to 52,665,000 per year through the maturity date. 



Interest expense on bonds payable for fiscal year 1998 totaled 51,332,000, net of 

 capitalized interest of $173,000. 



At September 30, 1998, the Smithsonian also had an interest-free loan from the 

 Virginia Department of Aviation totaling $1,000,000. The Virginia Department of 

 Aviation agreed, in fiscal year 1995, to make available to the Smithsonian an interest- 

 free loan facility totaling S3 million, of which $500,000 was drawn in fiscal years 1996 

 and 1997. This loan facility is intended to assist in the financing of the planning, 

 marketing, fund-raising, and design of the proposed National .Air and Space Museum 

 extension at Washington Dulles International Airport. The Smithsonian is scheduled 

 to repay the outstanding loan not later than June 30, 2000. 



(11) Affiliate Relationships 



The Smithsonian provides certain fiscal, procurement, facilities and administrative 

 services to several separately incorporated affiliated organizations for which certain 

 officials of the Smithsonian serve on the governing boards. The amounts paid to the 

 Smithsonian by these organizations for the above services totaled $1 64,000 of trust 

 funds and $70,000 of federal funds for fiscal year 1998. 



Deposits held in custody for these organizations at September 30, 1998, were 

 $4,864,000 and were recorded in the trust funds. 



The Friends of the National Zoo (FONZ). an independent 501(c)(3) organization, 

 raises funds for the benefit of the Smithsonian's National Zoological Park. Funds 

 received by the Smithsonian from FONZ are recorded as unrestricted revenue and 

 totaled 5548,000 in fiscal vear 1998. 



Interest and dividends 



Net realized and unrealized gain on investments 



Short-term invesrment total return 



S 1.700 

 680 



(9) Property and Equipment 



Property and equipment consisted of the following at September 30, 1998: 



(SOOOsi 





;-ii,: 



Federal 



Total 



Land 



Buildings and capital improvements 



Equipment 



Leashold improvements 



S 2.387 



159.668 



25.295 



2.290 



818.325 

 49.283 



2.387 



977.993 



74.578 



2.290 



Accumulated depreciation 



189.640 

 '69.901) 



867.608 

 '427.505) 



1.057.248 

 (497.406) 



Total properiy and equipment 



S 119.73' 



440.103 



-■ ? " x 4 2 



At September 30, 1998, buildings and capital improvements included 528,135,000 

 and $125,296,000 of construction in progress within Trust and Federal funds, respec- 



ts) Commitments and Contingencies 



(a) Leasing Actiiities 

 Leases for Smithsonian warehouse and office spaces provide for rent escalations to 

 coincide with increases in property taxes, operating expenses attributable to the leased 

 property and the Consumer Pnce Index. The Smithsonian has the authority to enter 

 into leases for up to 30 years using federal funds. 



The Smithsonian's operating leases for the warehouse and office spaces require future 

 minimum lease payments as follows: 



SOOOsi 



1999 

 2000 

 2001 

 2002 

 2003 

 Thereafter 



Total 



13.066 

 9.550 

 9.291 

 9.1 19 



S.240 



29.549 



7S.S15 



Rental expense for these operating leases totaled $15,516,000 for fiscal year 199S. 



293 



